Unequal Taxes on Equal Benefits

The Taxation of Domestic Partner Benefits

Workers who have an unmarried domestic partner are taxed doubly on employer-provided health coverage. A new CAP report offers a solution.

Download the full report (pdf)

Employer-provided health insurance is the backbone of health coverage for American families. Most people who have health insurance get it through their own employer or a family member’s employer. Public policy encourages employers to provide health insurance by exempting that form of compensation from taxation. As a result, married workers who get family health insurance benefits get a double benefit—they get health insurance coverage for their spouses and children and are not taxed on the value of that coverage.

In sharp contrast, workers who have an unmarried domestic partner are doubly burdened: Their employers typically do not provide coverage for domestic partners; and even when partners are covered, the partner’s coverage is taxed as income to the employee. Employers who cover domestic partners are also penalized under current law, since employer payroll tax responsibilities increase along with employees’ income and Social Security taxes.

As a result, the taxation of domestic partner health care benefits sets up a two-tiered tax policy that costs many American families and their employers millions of dollars each year. This report estimates the financial impact of this extra tax on employees and employers.

In this report, we will detail how employees with partners now pay on average $1,069 per year more in taxes than would a married employee with the same coverage. Collectively, unmarried couples lose $178 million per year to additional taxes. U.S. employers also pay a total of $57 million per year in additional payroll taxes because of this unequal tax treatment. Because the number of unmarried couples is growing, over time this unfair treatment will affect millions of families.

To remedy this situation, we recommend that Congress enact legislation now under consideration that would eliminate this federal tax on equal benefits. The legislation would exclude the value of domestic partner benefits, or DPBs, from income subject to taxation just as the value of employee and spousal benefits is excluded.

Download the full report (pdf)


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